Three years out, Superstorm Sandy litigation continues to wend its way through New Jersey’s courts.  Last weekend, a federal judge in the state handed a victory to the insurer in Stiso v. State Farm Fire & Cas. Co., 2015 U.S. Dist. LEXIS 155762, 2015 WL 7296081 (D.N.J., Nov. 18, 2015).  In doing so, the court reaffirmed the enforceability of what it called anti-concurrent causation (ACC) “lead-in” language.  It also rejected the doctrine of “spoliation based on encouragement” – the policyholders had argued that they could not meet the burden of showing that all of their loss was caused by a covered peril because the carrier had “actively encouraged” them to begin repair early on and thereby “persuaded” them to destroy evidence that they subsequently needed.

The insureds owned a split-level home in Point Pleasant Beach.  The structure was two-and-one-half blocks from the Atlantic, and it was inundated when Superstorm Sandy struck on October 29, 2012; water lines inside the home were four-and-one-half feet high on the lower level and 12” high on the upper story’s walls.  The policyholder made clam for $154,186. 

The contract of insurance excluded water damage if it was the result of an external flood or water or sewage entering through sewers or drains outside of the building, and that provision was prefaced by an ACC clause.  There was coverage, however, if the water damage was occasioned by water from the plumbing system inside of the home’s interior or by overflow from a system designed to remove subsurface water around the foundation.  The insurer and its expert determined that no more than 6” of the water was backup from the lower level bathroom drains, and it refused to pay more than $47,709.  The insureds argued that all of the flooding was caused by “a massive backup of sewer and flood waters within the [p]roperty,” and they filed suit.

On November 18th, Judge Freda Wolfson granted the carrier’s motion for summary judgment.  The court held that under New Jersey law, the ACC language meant that the policyholders had to demonstrate that the covered peril of sewer backup “directly, and solely, caused the damage.”  If the loss was “concurrently caused by both flooding and overflow water from the premises’ drainage system,” there was no coverage, and the court held that the insureds had not met their burden of showing that there was a genuine issue of material fact that all of the damages were indeed occasioned by sewer backup.

In an effort to salvage their case, the insureds had also invoked the doctrine of spoliation, arguing that the insurer’s representative had actively encouraged them to remediate the property during his initial visit, “thereby destroying certain crucial evidence” of loss by a covered peril.  That being the case, they alleged that the carrier was equitably estopped from denying coverage for the whole loss because it had “persuaded” them to discard the evidence they now needed.

Judge Wolfson was unimpressed, holding that the “proposed legal theory of ‘encouraging spoliation’ does not exist as a matter of law.”  As her opinion explained:

I have extensively researched Plaintiffs’ invention of spoliation grounded in the concept of a party encouraging another to destroy or alter evidence necessary for trial.  Unsurprisingly, my research has not revealed any case law supporting such a theory. . . . [T]he creation of the spoliation doctrine aims to punish the party who controls and destroys the evidence.  In this case, regardless of whom may have encouraged Plaintiffs to remediate the Property, Plaintiffs remain the party in control of the evidence at issue.

In other words, because the policyholders were the party in control of the residence, it was incumbent on them to take the steps necessary to preserve any evidence that sewer backup and not external flood water had caused their loss before effecting repairs, and their failure to do so was fatal to their claims.